Educational Articles

Oil Demand Picking Up On Improving Global Economy

Robert Mitkowski
| June 03, 2010

There are encouraging signs that the economic recovery is pushing up global crude oil demand. That’s true in both emerging markets, such as China, and the more mature United States, which is still by far the world’s leading energy consumer. Combined, Americans use 23% of all the oil consumed, much more than the next closest nation, China, which accounts for about 10% of global consumption. All of the major forecasting agencies agree that about a 1.7% rise in global oil demand is likely for 2010. That would be above the long-term average annual growth rate.

If demand picks up as expected, it would represent the first increase in oil usage since 2007, or before the recent sharp recession hit demand hard. Worldwide consumption is currently around 85 million barrels a day. Even assuming a modest 1% annual growth rate, consumption would reach 100 million barrels a day in 17 years.

Reaching that level of capacity would be a tall order for the oil industry, given high field depletion rates, and pushes the major oil companies, such as ExxonMobil (XOM) and Chevron (CVX) to expand their drilling programs. Higher capital spending on the part of the producers directly benefits the oilfield services industry. Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), among others, would be among the major beneficiaries under the scenario outlined above, since their products would be needed to an ever-increasing degree.

Whether or not demand projections work out depend on how strong economic growth turns out to be. Employees driving to work every day account for a substantial portion of oil demand. That said, a jobless recovery would have a hollow tone to it for the oil industry. The 3%, or slightly higher, GDP growth expected in the United States in 2010 and 2011 may not be enough to generate substantial hiring right away, either. The often slow comeback in the job market is one reason it often takes oil shares a relatively long time to bounce back following an economic downturn.

Longer term, it’s apparent that most of the increase in demand for petroleum products will be generated from developing regions in the Asia-Pacific region and the Middle East. Europe and North America are mature markets, where it will be tough for oil demand to push past previous highs, as conservation and efficiency move up on the priority list. China and India, however, represent around one-third of humanity, and are home to the greatest economic miracle in the history of mankind, where hundreds of millions of people have been lifted out of abject poverty through modernization and industrialization. Rapid growth in up-and-coming nations such as these underpins the bullish case for demand.

Meantime, the spill in the Gulf of Mexico at a well owned by BP (BP) and Anadarko Petroleum (APC) ought to support oil prices, since it will delay the opening of new offshore acreage for drilling. The high probability of increased costs as additional safety measures are required will affect profitability, though. Companies such as Apache (APA), which had been purchasing assets in the Gulf of Mexico may be affected. A moratorium on offshore drilling is unlikely, though, given the need for reliable sources of oil.

Oil prices being supported in large part by prospects for a much greater call for petroleum from China and India in the decades ahead provide the incentive to drill. Recently, however, the sovereign-debt troubles in Europe that threaten the pace of the global economic recovery have at least temporarily put the brakes on the rally in oil quotations. But there’s no question the world will need plenty of oil for many years to come.